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Coordinating monetary and macroprudential policies

  • Bianca De Paoli
  • Matthias Paustian

The financial crisis has prompted macroeconomists to think of new policy instruments that could help ensure financial stability. Policymakers are interested in understanding how these should be set in conjunction with monetary policy. We contribute to this debate by analyzing how monetary and macroprudential policy should be conducted to reduce the costs of macroeconomic fluctuations. We do so in a model in which such costs are driven by nominal rigidities and credit constraints. We find that, if faced with cost-push shocks, policy authorities should cooperate and commit to a given course of action. In a world in which monetary and macroprudential tools are set independently and under discretion, our findings suggest that assigning conservative mandates (á la Rogoff [1985]) and having one of the authorities act as a leader can mitigate coordination problems. At the same time, choosing monetary and macroprudential tools that work in a similar fashion can increase such problems.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 653.

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Date of creation: 2013
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Handle: RePEc:fip:fednsr:653
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  1. Christopher Otrok & Gianluca Benigno & Huigang Chen & Alessandro Rebucci & Eric R. Young, 2012. "Monetary and Macro-Prudential Policies: An Integrated Analysis," Working Papers 1208, Department of Economics, University of Missouri.
  2. Walsh, Carl E., 2005. "Endogenous objectives and the evaluation of targeting rules for monetary policy," Journal of Monetary Economics, Elsevier, vol. 52(5), pages 889-911, July.
  3. Coenen, Günter & Lombardo, Giovanni & Smets, Frank & Straub, Roland, 2008. "International transmission and monetary policy cooperation," Working Paper Series 0858, European Central Bank.
  4. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  5. Isabel Correia & Juan Pablo Nicolini & Pedro Teles, 2008. "Optimal Fiscal and Monetary Policy: Equivalence Results," Journal of Political Economy, University of Chicago Press, vol. 116(1), pages 141-170, 02.
  6. Timothy Fuerst & Matthias Paustian & Charles Carlstorm, 2009. "Optimal monetary policy in a model with agency costs," 2009 Meeting Papers 667, Society for Economic Dynamics.
  7. Denis Beau & Christophe Cahn & Laurent Clerc & Benoît Mojon, 2013. "Macro-Prudential Policy and the Conduct of Monetary Policy," Working Papers Central Bank of Chile 715, Central Bank of Chile.
  8. Andrew P. Blake & Tatiana Kirsanova, 2008. "Inflation-Conservatism and Monetary-Fiscal Policy Interactions," Discussion Papers 0801, Exeter University, Department of Economics.
  9. Javier Bianchi, 2009. "Overborrowing and systemic externalities in the business cycle," FRB Atlanta Working Paper No. 2009-24, Federal Reserve Bank of Atlanta.
  10. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
  11. Fabrice Collard & Harris Dellas & Behzad Diba & Olivier Loisel, 2012. "Optimal Monetary and Prudential Policies," Working Papers 2012-34, Centre de Recherche en Economie et Statistique.
  12. Ignazio Angeloni & Ester Faia, 2009. "A Tale of Two Policies: Prudential Regulation and Monetary Policy with Fragile Banks," Kiel Working Papers 1569, Kiel Institute for the World Economy.
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